March 14 (Bloomberg) -- The Bank of Korea left the
benchmark interest rate unchanged as a new government considers
more fiscal support for Asia’s fourth-largest economy.

Governor Kim Choong Soo and his board held the seven-day
repurchase rate at 2.75 percent after a 25 basis-point cut in
October, the central bank said in a statement in Seoul today.
Twelve of 16 economists surveyed by Bloomberg News predicted the
decision while the rest forecast a reduction.

President Park Geun Hye, who took office on Feb. 25, is
grappling with North Korean tensions, yen weakness that aids
export rivals in Japan, and the drag on consumption from
elevated household debt. Her nominee for finance minister, Hyun
Oh Seok, told lawmakers yesterday that “short-term policy
support” is needed for the economy.

“Policy should remain focused on risk management rather
than the acceleration of growth, given flare-ups in geopolitical
tensions with North Korea, yen movements and the high level of
household debt,” Kwon Young Sun, a Hong Kong-based economist at
Nomura International Ltd., said before the announcement. The
economy may “grow modestly on improved global demand and the
government’s targeted stimulus measures.”

Officials are concerned at the risk that growth will fail
to recover to closer to its potential rate, estimated at 3.8
percent by Kim, after a 2 percent expansion last year was the
weakest since the global recession.

‘Modest Improvement’

The economy is “expected to maintain its trend of modest
improvement” in coming months, the BOK said in a statement
after the decision. At the same time, fiscal tightening in
advanced nations and changes in the yen’s value pose risks, the
central bank said. A “moderate recovery” has been sustained
since the fourth quarter of last year, although the improvement
has been “faltering slightly,” it said.

“We may change our economic forecast next month but the
growth path projected in January is still valid,” Governor Kim
told reporters today. “Some data showed improvement in February
from January. The current quarter will see stronger growth than
the fourth quarter of last year.”

Some investors had expected a rate cut, as signaled by a
three-year bond yield falling to a record low this week. The
Kospi index of stocks extended losses after the decision,
falling as much as 1.1 percent percent in Seoul. The yield on a
2.75 percent bond due December 2015 rose 2 basis points to 2.62
percent after the decision, according to prices from Korea
Exchange Inc.

Abundant Liquidity

Governor Kim said in an interview last month that an
improved global outlook increased the odds of exceeding the
central bank’s 2.8 percent forecast for South Korea’s growth
this year, and liquidity was “abundant.”

While tensions with North Korea have pared the won’s gains,
the currency is still up about 24 percent against the yen in the
past six months, hindering South Korea’s exporters of
automobiles and electronics.

The government is already delivering a fiscal boost by
allocating 72 percent of budget spending for 2013 to the first
half.